Not only NBFCs but India Inc as a whole is staying away from taking any risk. From lenders to entrepreneurs and investors to corporates, everyone is hoarding cash and deferring investments said, Prabodh Agrawal, CFO, IIFL Finance to ETCFO in an exclusive conversation with Ishan Shah and Mannu Arora.

He portrayed the current picture of NBFC and said there is demand for credit from retail and SME customers but not enough funds. He argued why are they passing high cost of funding to borrowers. Edited excerpts:

Q: How are you reading the current economic slowdown?

Prabodh Agrawal: The current slowdown seems to have permeated most aspects of investment, consumption, and export segments of the economy.

Investment outlook has been weak for the last few years, as reflected in slowdown in new project announcements and weak credit growth.

Q: What has caused the slowdown? What measures will it require from the government?

Prabodh Agrawal: We are currently at an extreme level of risk averseness. Anyone and everyone is risk averse including lenders, entrepreneurs and consumers.

Everyone is hoarding cash and deferring investment/consumption. This has to change and the government can help restore confidence earlier then if it were to be left to happen in the natural course.

For example, recent policy measures have encouraged banks to lend to NBFCs. But more can be done. Banks have their own board approved limitations on taking exposure to NBFC sector.

This needs to be reconsidered as NBFCs are just intermediaries and lend to a wide array of industries. Moreover, banks have had a good credit experience with NBFCs, despite recent troubles with some NBFCs/HFCs.

Q: What has been the slowdown impact on your business?

Prabodh Agrawal: For NBFCs like us, funding has become very tight, which is leading to a slowdown in our AUM growth. We believe that demand for credit is still there from retail and SME customers.

Q: How are you specifically dealing with the slowdown?

Prabodh Agrawal: NBFCs depend on other lenders for their borrowings. Traditionally, the bulk of their borrowings have been from banks, mutual funds, insurance companies and refinance from NHB/SIDBI.

While overall AUM growth has slowed down, we are managing it by growing in our chosen products, while slowing down in others. We have been able to protect our margins by passing on the higher borrowing cost to our customers.

Of late the cost of funds have also stabilised and begin to come down. We have also been able to maintain our asset quality and NPA levels have not risen.

IIFL's Strategy to Deal with Crisis

Explore newer sources of funding including public issue of NCDs

Focus on growing chosen products

Pass on higher borrowing cost to customers

Q: How is your developer and construction finance book looking like? It is still about 14 per cent of the total AUM?

Prabodh Agrawal: Our developer & construction finance book declined both on QoQ and YoY basis. It will continue to decline and we intend to bring it down to below 10 per cent of our total AuM in the near future.

Delinquencies in this book have not risen. GNPAs have declined due to a combination of recoveries and write-offs.

Q: What are your focus areas of growth?

Prabodh Agrawal: We have identified four focus areas of growth including home loans, business loans, gold loans and micro-finance loans. These four segments account for 85 per cent of our AuM and this share has been growing. We provide small-ticket granular loans to middle class borrowers in these segments.

This helps us realise better yields and also de-risk the portfolio by spreading the credit risk. Nearly, half of our loans qualify for RBI’s priority sector lending (PSL) norms and are attractive to banks to meet their PSL obligations.

We regularly sell-down both PSL and non-PSL loans to government, private and foreign banks. Recent RBI guidelines allowing banks to lend to NBFCs for onward lending to certain priority sectors including agriculture, MSME and home loans, should allow us to borrow and grow in these segments.

IIFL's Focus Areas

Home Loans

Business Loans

Gold Loans

Micro-Finance Loans

Q: Your average borrowing costs increased by 68 bps to 9.3 per cent for the year. Would you pass on the increase to your customers if there is any?

Prabodh Agrawal: So far we have been able to pass on the higher cost of borrowing to our customers and protect our interest margins.

Q: What funding instrument according to you is the most attractive right now? And Why?

Prabodh Agrawal: ECBs are very attractive at this juncture due to abundant liquidity in global markets and soft rates. We are supplementing this with domestic borrowings from banks and insurance companies.

Q: When do you see the funding costs going down in the domestic debt markets? Also, what is your assessment of the masala bonds?

Prabodh Agrawal: In the domestic debt market, while G-Sec yields have fallen, borrowing costs for corporates have not fallen proportionately due to widening of credit spreads. This is linked to the heightened level of risk averseness referred to above.

We expect the credit spreads to get normalised in the next few months and hence, borrowing costs to decline.

Masala bonds are also an extension of overseas borrowings. We have raised money through Masala bonds in the past.

Q: Your gross NPA was about 2 per cent this quarter. Do you expect asset quality to worsen or improve from here? And why?

Prabodh Agrawal: Historically, our gross NPAs have been around or below 2 per cent and our net NPAs have been around or below 1 per cent. This has been achieved across cycles as we have a diversified product range.

Moreover, with stable products like home loans and gold loans now accounting for over half of our AUM, we do not expect any major spike in our NPA levels.

Q: Is there any stressed account where you have significant exposure and are cautious?Prabodh Agrawal: I cannot discuss specific accounts. But generally, we have managed any stress on our book well and will continue to do so going forward.

Q: Crystal gazing into the future, where do you see the NBFC story in the next couple of years? What makes you confident?

Prabodh Agrawal: NBFCs play a critical role in the intermediation of credit, especially to the retail and SME segments. The dwindling availability of funding to NBFCs is a key reason for slowdown of credit growth in the system.

Moreover, this has affected retail consumption and is reflected in slowing sales of passenger and commercial vehicles, consumer goods and personal consumption. Availability of credit to the MSME sector has also been significantly affected.

Q: Does the fear of a global slowdown worry you? Developed economies are also facing a significant slowdown? What does this mean for India?

Prabodh Agrawal: Global slowdown is a concern. But India can use it to its advantage if we are able to attract global investors to invest here.

Fall in prices of global commodities including oil can be a huge advantage for us.

The sandbox affords a valuable learning experience, allowing them to keep pace with technological advancements and new business models that may not conveniently fit into the existing regulatory framework.

"Impact is positive...last year, the government had merged Bank of Baroda with Dena and Vijaya, the platform is ours," Infosys Finacle Senior Vice President and Global Head of Sales Venkatramana Gosavi said.

Facebook's Libra cryptocurrency suffered another setback on Wednesday when Switzerland said the proposed payments system could face strict rules that typically apply to banks, on top of tough anti-money laundering laws.

Online insurance sales for new business, which are in a nascent stage in the country, are fast catching up and are likely to grow at a CAGR of 13 per cent to become a Rs 2.6 trillion ($37 billion) opportunity by 2025, according to a recent report by JM Financial.